How To File Taxes For Less

Have you ever seen the movie “Meet Joe Black” with Brad Pitt and Anthony Hopkins? Before some of you get carried away with the mere mention of Brad, please remind yourself of this blog’s theme. Anyway, in the movie, Brad Pitt plays the grim reaper and is confused by something other than death being certain: taxes. Perplexed, he then asks the question: “Death AND taxes?” Well, the certainty of taxes is upon us again and, like you, I am having a hard time reining in my enthusiasm. So, instead of delving into some technical tax nuances, I thought to ease into tax season with some cursory observations I’ve made, as someone who’s helped hundreds do their taxes.

How To File Taxes For Less

Here are a few things to watch out for when filing your taxes.

1. Getting charged by the form.

About 59% of you will pay a commercial preparer to complete your taxes and you are probably getting ripped off, especially those in a rush to get your refund. What I think is unfair is that most of your tax preparers charge by the form. And, this can really add up in costs for what really is not much extra time for your preparer to just input data. With software, the majority of taxes (say, a couple of W-2s, a 1099, home interest deduction and other itemized deductions, etc.) takes about 30 minutes. So, charging by the form seems unreasonable to me unless they are filling it out by hand with a sharp #2. $100 to $150 or more for 30 minutes spent seems a bit much to me.

Tip: Check out our TurboTax review for coverage on a popular tax software application for do-it-yourselfers.

2. Be wary of those rapid refunds!

Moreover, to make matters worse, many of these outfits are selling rapid refunds without you knowing it or fully understanding the ramifications. Personally, I think it’s as criminal as the practices espoused by payday loan places. Refund anticipation loans or RALs often hit you with incredibly high fees, which, when compared to standard APR rates, can run over 1000% APR.

But what’s amazing is the report that around 1 in 15 taxpayers opt for this kind of loan in 2007. These folks wanted their money early (a short 10 days earlier than normal) and collectively paid a staggering $900 million to get it. And as you’d expect, the people who tended to do this are from lower income backgrounds. So perhaps you do not fall into this category and you think that 1 in 15 isn’t that high? But if it’s not you, perhaps someone you know has been impacted by this — usually the people who need money the most.

Unfortunately, many people are allured by the quick refund option, but if they knew better and opted for free e-file and direct deposit, they would receive their refund nearly as quickly and would also save quite a bit of money. Still, a large percentage of people year after year opt for the rapid refund. Why? Sure, many people may be behind on bills, etc. and could really use the money now, but it’s also big business. Not only does your tax preparer increase his/her pay and receive bonuses on these loans, but the companies themselves reap the benefits.

Let’s look at that a moment: from its own tax filings, reports show that H&R Block (along with HSBC Bank as a partner) made $190.2 million in 2008 on RALs. These loans actually amount to 4% of the tax giant’s revenues. That’s quite a big bite! On the flip side, about 20% of H&R Block customers who choose RALs are throwing their money down the drain. See why they may keep it confusing and push these products on people?

An interesting “study” done in a couple of cities caught my eye. Though the scope of the study was small, in my experience in places I have worked as a tax preparer, their findings are consistent and widespread.

The study found that tax preparers were not entirely forthcoming about RALs. While some inform their clients to avoid these loans, others don’t give their clients adequate warning. These tax professionals don’t thoroughly explain the costs, charges and risks that are associated with these loans. In fact, very few of the tax preparers in either city of the study informed testers about the option to receive a refund in 8 to 15 days if they e-file and use direct deposit.

3. How competent is your tax preparer?

The findings of incompetence among tax preparers were even scarier. The aforementioned study confirmed my personal experiences with fellow tax preparers who had worked with me part time. I knew a woman who had been doing taxes for 3 years and I was surprised she could enunciate the word “taxes” — she needed hand holding even with the most basic of tasks! Most of these folks, I am sorry to say, are not professionals. As of now, there are no formal requirements for tax preparers, although they claim they are thoroughly trained. Change is in the works, but until then, many of the people doing your taxes are grossly unqualified.

Many people justify the costs of getting an expert. But, please do not be fooled. Not, only are they charging exorbitant fees and misleading people about RALs and other charges, but the majority of the time, they are NOT experts and are no more qualified than you to prepare your taxes.

So, do yourself a favor! Unless, you’ve got a technical situation in your hands, I believe it’s best to do your own taxes. Many of the software packages out there are no different than what these pseudo-professionals use. Most people, I have found, don’t do their own taxes because they are lazy or too busy, intimidated about taxes, or afraid of the IRS if they make a mistake. Don’t let that stop you. Already, half of the population handles their own taxes. You can too.

If you’re not preparing your own taxes, try inexpensive alternatives like E-File-Tax-Returns.org, DIY H&R Block Tax Services, and FreeTaxUsa.com, which are services that can walk you through the process with additional help sections. You will get free federal e-file and will only have to pay a small nominal fee for state filings. If you are still not feeling confident, many communities offer pro bono tax preparation. Or you can find a preparer that proves his/her qualifications (doesn’t need to be a CPA) and has reasonable and easy to understand fees. Don’t be duped!

Buy Turbo Tax or H&R Block’s Tax Cut. You can do your Federal & save $60-$120. Tip, buy the Federal only (not state) as most State taxes can be done & eFiled free. Most retailers are only carrying the Federal + State this year so you may need to order the Federal Only online (usually get free shipping if sent to store).

-Dollars Not Debt

20smoneyFebruary 2, 2010 at 6:48 am

Awesome tips. Online Turbo Tax is pretty sweet. I’m using it!

LeeFebruary 2, 2010 at 9:15 am

I use to be a TaxCut customer for many years, then I found out about TaxAct a couple years ago and gave it a try. I’m happy to say 3 years later, I’m still using it. I can prepare and file both my federal and state tax returns for only $12.95. It makes me laugh when some of my relatives pay upwards of $50-$200 to let someone else do their taxes. I’m not affiliated with TaxAct, I just like their service and especially their price.

Ace of WealthFebruary 2, 2010 at 10:17 am

These are some really good tips. One question. For those that do have a complicated enough tax situation that warrants getting a preparer, how do you recommend they find one? What are some good questions to ask them to know whether or not you’re getting duped?

basicmoneytipsFebruary 3, 2010 at 4:54 am

I agree with the writer, be very cautious of these quick tax preparers. Most of these folks are not certified accounts, but rather people who do this on the side after taking a quick course. If your taxes are complex, use an accountant. If they are easy, just use TaxAct or TurboTax.